New Consumer Credit Directive CCD 2

Context and background

On 12 September 2023, the European Parliament published its Proposal for a Directive of the European Parliament and the Council on consumer credits (Consumer Credit Directive/ CCD2). The CCD2 will repeal and replace Directive 2008/48/EC on credit agreements for consumers (CCD1).

The CCD1 has undergone numerous revisions in the past decade to match the changing consumer credit market. However, despite these revisions, there have been ongoing challenges related to the increasing digitalisation of financial services, insufficient harmonisation, and concerns about consumer protection. These issues have prompted the European Commission to publish a proposal for a new directive on consumer credits tackling these challenges.

 

Key takeaways

Scope

First, the new proposal significantly broadens the scope of CCD1:

• In terms of value, CCD1 covers credit agreements ranging in value between EUR200 and EUR75,000. CCD2 expands the scope by including loans below EUR200 and credit agreements up to EUR100,000. However, credit agreements involving a total amount of more than EUR100,000 where the purpose of the credit is the renovation of residential immovable property are excluded from the scope of CCD2.
• Additional types of loans are also brought into the scope of the CCD2: crowdfunding credit services, credit agreements in the form of an overdraft facility whereby a creditor makes funds available which exceed the balance in the consumer’s account, payday loans where the consumer is expected to repay the loan’s principal from their next monthly salary, and credit granted free of interest and without any other charges, including buy-now-pay-later schemes. In addition, leasing agreements with an option to purchase goods or services are included.

Pre-contractual information

With the goal of increasing consumer awareness and promoting responsible lending practices, CCD2 amends information requirements in the pre-contractual phase to ensure they cater to digital services. CCD2 requires lenders to provide key elements of the credit (such as borrowing rates and costs, annual percentage rate of charge, the total amount of credit and the duration of the credit agreement) in a prominent way on the first page of the Standard European Consumer Credit Information form. The information summarised in this form should be clear, legible, and adapted to mobile phone screens.

In addition, the consumer is given the right to withdrawal (within 14 days) without penalty and with no obligation to provide justification starting from the day of the credit agreement or from the day when the consumer is handed the terms and conditions. In the event that the consumer does not receive contractual terms and conditions, the withdrawal period will expire 12 months and 14 days after the conclusion of the credit agreement.

Creditworthiness assessment

CCD2 also reviews the rules on creditworthiness assessments where the consumer’s ability and propensity to repay the credit is assessed and verified before a credit agreement. Corresponding to article 8 of CCD1, lenders are required to perform creditworthiness assessments. As opposed to CCD1, which didn’t provide guidance on the approach to be taken based on the outcome of the assessment, credit can now only be made available to the consumer if the result of the assessment is positive. This prevents irresponsible lending practices and over-indebtedness. However, deviations may be made in specific cases (eg loans for healthcare expenses and student loans).

When the creditworthiness assessment is based on automated processing, consumers have the right to request and obtain a meaningful explanation of this assessment by the creditor, and they should also be able to express their point of view and contest the assessment.

Prevent certain practices and advertising

Practices that exploit consumer behaviour such as product tying, pre-ticked boxes, and unsolicited credit sales are being addressed. It is important to prevent these practices, which may induce consumers to enter into credit agreements that are not in their best interests. The bundling of products, however, is allowed. In addition, certain advertisements, such as those encouraging consumers to take out a loan, are prohibited. Advertisements for consumer loans must also include clear and prominent details of the costs involved.

Caps on charges

Other amendments include caps on interest rates, annual percentage rates of charge, and the total cost of the credit agreement. This capping system is already a common practice in EU Member States. It prevents abuse and means consumers cannot be charged with excessively costly consumer loans. The proposal leaves the decision on the level of these caps in the hands of EU Member States.

Forbearance measures

Lastly, given the significant consequences of enforcement proceedings for creditors and consumers, the CCD2 requires creditors to proactively deal with emerging credit risk at an early stage and to put in place necessary measures to ensure they exercise reasonable forbearance and make reasonable attempts to resolve the situation through other means before enforcement proceedings are initiated.

Next steps

After being adopted by the Council, CCD2 will be published in the EU Official Journal and will enter into force on the 20th day after its publication. There will be a 24-month deadline for the transposition of this directive and one additional year for the application of these measures.

CCD1 will continue to apply to credit agreements that have entered into force prior to the adoption of CCD2 and shall continue to do so until their termination.